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TERRORIST FRONTS REPRESENT A NEW THREAT TO U.S. LANDLORDS

By Dees Stribling

Not that they really needed it, but landlords now have yet another reason to lie awake at night. Dealing with a tenant, contractor or anyone else who might have ties to terrorism can net a property owner a stiff fine and some jail time. And if that is not enough, just checking such parties out for terrorist ties is a major headache, according to those with experience in the matter.

Not long after the September 2001 attacks on the World Trade Center and the Pentagon, President Bush signed Executive Order 13224, titled “Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit, or Support Terrorism.” As one of a host of anti-terrorism measures taken in the years since the attacks, the order has the force of law and applies to anyone owning real estate. Landlords found to have contracted with terrorists in willful violation of the order face fines ranging anywhere from $50,000 to $1 million and up to 30 years in jail.

Yet, the order has not received the attention or notoriety of such measures as the Patriot Act, not even within the real estate industry, which it affects directly. The order’s essential language prohibits “any transaction or dealing by United States persons or within the United States in property or interests in property” with terrorists or suspected terrorists, as designated by the government. The order applies to everyone in the United States — citizens or resident aliens, domestic or foreign corporations and other entities — and specifically to real estate transactions.

The ownership structures covered range from the largest REIT holding millions of square feet of gross leasable area to some partnership of dentists who happen to have invested in a couple of open-air centers. Moreover, the regulation covers all aspects of the real estate business, including lease and sales transactions, finance, brokerage, joint ventures and even the hiring of third-party service providers.

“The order is very broad,” said real estate lawyer Brad Sherman, a partner at Little Rock, Ark.-based Gill Elrod Ragon Owen & Sherman. “Regulations defining what’s included were only issued in 2003, and as yet there are no industry standards on exactly how to comply with the order, but everyone in real estate needs to pay attention to how these standards evolve.”

In some ways, the order does not represent anything really new, though it may be new to real estate. It supplements previous laws and executive orders designed to combat money laundering and drug trafficking, many of which predate Sept. 11, 2001. The thrust of these measures is to impede terrorism by “blocking” (that is, prohibiting) business deals that use fronts to fund terrorism.

If a landlord leases space to a terrorist front, becomes a partner in a development with financial interests tied to terrorists or even hires a maintenance company with a suspect background, any of that could be a violation. The criminal penalties can be accompanied by civil penalties.

Though the odds of dealing with a terrorist or suspect are probably very low, “the consensus among the real estate bar seems to be that it is better to comply with the Executive Order and protect yourself and your client rather than risk the stiff penalties and stigma that would follow by inadvertently violating it,” wrote Michael S. Strauss and Thomas Pomella, real estate lawyers of Quincy, Mass.-based Stop & Shop Supermarket Cos., in the April 2005 issue of Commercial Leasing Law & Strategy.

But how is the law-abiding landlord to know who is a terrorist suspect? Initially, the order listed a number of individuals or entities as blocked. A much larger list of “Specially Designated Nationals (SDNs) and Blocked Persons,” which includes the names in the order plus a good many more, is now maintained and updated by the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC). Anyone can download a copy of the list from the department’s Web site.

Things are not that simple, though. For one thing, the list itself is more than 200 pages long, with more than 4,000 SDNs on it, and presents a vast briar patch of similar-sounding or common names, aliases and other potential sources of confusion, such as names that generate false positive matches.

Thousands of people on the government’s list of suspected terrorists have used a confusing array of aliases and bogus personal information.

Not only is the list itself cumbersome, but the order provides no specifics about the mechanics of compliance. “It doesn’t say how often it should be checked,” said Elizabeth Belkin, a real estate lawyer at Chicago-based DLA Piper Rudnick Gray Cary. “Would it be enough to check it quarterly? Maybe not. New transactions need to be checked, of course, but what about existing ones, and even people you’ve been doing business with for years?”

It seems the order requires that even long-standing business relationships need to be checked, Belkin says. In short, compliance could prove a time-consuming chore, but one she says landlords would be wise to do.

Considering the difficulties involved, where should a landlord start? “Every landlord should have an internal policy in place for dealing with compliance, and someone who’s responsible for seeing that it’s followed,” said Sherman. “Any landlord would be wise to check the list. It’s becoming an additional form of due diligence.”

Belkin agrees. “Take the order seriously, and consult an attorney who understands the issues if you don’t know what to do,” she said.

A cottage industry has sprouted to help landlords comply with the order, partly composed of attorneys, but also including specialty software firms. Software that automates the process of checking the OFAC list is now available.

Some confusion about the order stems from the fact that similar measures have been used previously to control money laundering within the financial services industry.

“The idea that the order is only for banks is a myth,” says Mark McClanahan, compliance solutions director at one of the companies that markets list-checking software for the real estate and other industries. “So far some of the largest real estate companies, and some of the larger landlords, are working on compliance issues, especially because of the ‘reputational’ risks, or because counsel has advised them to do it. But the real estate industry has a long way to go in complying with the order.”

Experts also advise landlords to add language into leasing and other documents by which the tenant warrants or represents that it is not, in fact, in league with terrorists. Such language may not deter any real terrorists from doing business with a landlord — it is unlikely that anyone would admit being on the OFAC list in writing — but it might show after the fact that a landlord was aware of the order and took steps to comply.

Or it might not. As yet, there is no experience in terms of indictments or prosecutions to let the industry know the value of such language. Still, the language “should be in all documents, not only leases but also loan documents and purchase agreements,” said Belkin. “If nothing else, it lets the applicants know that you’re monitoring the issue. And if it happens that he or she is on the OFAC list, that person might stay away from you.”